Comprehensive Analysis of Reverse Charge for Services in GST Era

As we are migrating from an existing tax structure to new tax structure, it is imperative to understand the new law in conjunction with the old law as well. So with such approach I have tried to analyze the reverse Charge mechanism for services as proposed by GST council with the existing Reverse charge mechanism as given in Notification No. 30/2012(as amended up to date) issued by CBEC.

There are total 12 services in respect of which Reverse charge has been proposed by GST Council, and their point wise analysis will be done here. However before starting discussion about reverse charge it is necessary to understand what Reverse Charge actually means.

“In terms of Section 09(3) of CGST Bill, Central Government may on the recommendation of the council, by notification, specify category of goods and/or services the tax on which is payable on reverse charge basis and the tax thereon shall be paid by the recipient of such goods of services.

Normally it is the supplier of goods or services who is supposed to pay GST on supply of goods or services. But in specified circumstances this liability is reversed and thus the tax becomes payable by recipient of supply rather that provider. This mechanism is called Reverse charge mechanism.

1. Import of Services

Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory other than non- assesse online recipient (OIDAR)

Service Provider: Located in Non-taxable Territory

Service Receiver: Located in Taxable Territory except Non assesse online recipient

Reverse Charge:  100%

√ It signifies that if there is import of services then there would be reverse charge and IGST would be payable by service recipient located in taxable territory.

√ However as far as charge of tax is concerned as per clause (b) of section 07 of CGST Bill, supply includes importation of services for consideration whether in the course or furtherance of business or not. So it doesn’t matter that the services received are whether for business use or personal use it will be treated as supply and hence tax would be payable. However in case of non-business entity ( i.e. Government, local authority , governmental authority, individual or any other person not registered),  if receiving Online information and database access or retrieval services (i.e. OIDAR) then there would be no reverse charge and hence no tax payable actually.

√ In all other cases i.e. import of services is duly taxable and tax would be payable by the service recipient.

√ This category of reverse charge exists in notification no 30/2012 at clause no 10, but any exception is not there.

2. Goods Transport Agency Services :

Services provided or agreed to be provided by a goods transport agency (GTA) in respect of transportation of goods by road

Service Provider: Goods Transport Agency

Service Receiver:  Factory/Society/ Cooperative society/ registered taxable person/body corporate/ partnership firm/casual taxable person

Reverse Charge:  100%

√ In new GST law the definition of Goods Transport agency has not been provided, so literally it means that “ a person who facilitates the transportation of goods from one place to other on behalf of other persons. However in existing service tax law as per section 65B(26) of finance Act, 1994“GTA is a person who provides services in relation to transportation of goods by road and issues Consignment note”

So existing law made it clear that GTA would be person who transports goods by roads only whereas in new law due to absence of any definition GTA would be any person who facilitates transportation of goods

√ It is proposed that all the existing exemption in service tax law will continue in GST regime too for services.

As per existing law a) services in relation to transportation of goods by road (except GTA services & Courier Agency services), b) transportation of goods by Aircraft, c) Transportation through inland waterway, d) transportation of specified Goods by rail and e) transportation of specified goods by GTA are either not taxable services or are exempt services. So it is expected that these exemption will continue further, however the actual scenario would be cleared once the notification in this regard will be issued.

√ So, in GST regime services regarding Transportation of goods will be taxable in respect of a) GTA services except for transportation of specified goods ( not only for transportation of goods by road in fact) b) transportation of goods (except specified goods)by railway c) Transportation of goods by vessel from outside India up to the custom clearing stations of India

√ However there is a minor rise in rate of tax at which these supply of services will be taxed. Under current law as per abatement scheme in respect of every services above mentioned 70% abatement is there and hence the effective rate of tax comes out to be 4.50%. But the new rate proposed are 05% for all these category of services specified above.

√ The reverse charge for GTA is available under existing service tax law too at Sr. no 02 of notification no 30/2012. The charge is almost same in respect to services by GTA in relation to services performed for transportation of goods by road.

3. Services by Advocates :

Services provided or agreed to be provided by an individual advocate or firm of advocates by way of legal services, directly or indirectly

Service Provider: Individual Advocate or firm of advocate

Service receiver: Any business entity

Reverse Charge: 100%

√ As per exemption notification no 25/2012, services provided by an advocate or firm of advocate (except senior advocate) to a) other advocate or firm of advocate or b) any person other than business entity or c) business entity up to a turnover of Rs. 10 lakh will be exempt

√ And since it is expected that existing exemption will continue, services of advocate will be taxable only a) if provided to a business entity by advocate or firm of advocate or b) by senior advocate in any case

√ If there is supply of services to the business entity having turnover of whatever amount by an advocate or firm of advocate or senior advocate, such supply would be liable to GST.

√ The criteria regarding 10lakh rupees turnover tends not to be GST regime because in Reverse charge mechanism there is no mention of turnover criteria and moreover there is an emphasis to reduce the exemption base so that there would be minimum cascading effect.

√ However reverse charge would be only in respect of Advocate or firm of advocates service provider. If the service being provided by a senior Advocate then there would be forward charge

√ The rate of tax would be however 18% i.e. 03 % more than that of existing rate of 15%

√ The reverse charge for Advocates is available under existing service tax law too at Sr. no 05 of notification no 30/2012. The charge is almost same in respect to services by Advocates with only one exception that business entity with turnover exceeding Rs. 10Lakh is used in place of business entity.

4. Services of an Arbitral Tribunal

Services provided or agreed to be provided by an arbitral Tribunal

Service Provider: Arbitral Tribunal

Service Receiver: Any Business Entity

Reverse Charge: 100%

√ As per Schedule III of the CGST Bill “any services by any court or tribunal established under any law for the time being in force will not be treated as supply of service and hence would not be levied to tax.

√ As it is expected that existing exemption in service tax law will continue under GST regime too, clause 06(a) of notification no 25/2012 specifies that “any services of arbitration tribunal to any non-business entity would be exempt”.

√ Here it is important to understand that an arbitration tribunal is different from tribunal established under any law. Arbitral Tribunal is an arbitrator appointed under the provisions of arbitration and conciliation Act, 1996.

√ So all the services provided by any court or tribunal (which is established under any law) would not be levied to tax. Also if the services provided by arbitration tribunal to any non-business entity then also it would not be levied to tax.

√ So only the services provided to any business entity by any arbitration tribunal would be subject to GST and 100% reverse charge is there in that case. I.e. GST will be paid by person who seeks appointment of an arbitrator.

√ Same provision contained in Notification no 30/2012 also with no exception.

5. Sponsorship services

Service Provider: Any person

Service Receiver: Body Corporate or partnership firm

√ Under existing service tax law as per notification no 25/2012 “ Sponsorship services provided to specified tournaments or championships (not IPL) would not attract service tax. Apart from that all sponsorship services will be subject to tax. So under GST regime the position is expected to remain the same.

√ However whether it be existing law or upcoming GST law, if the sponsorship service provided to either Body Corporate or partnership firm, then only there is reverse charge otherwise there would be forward charge.

6. Services by Government or local Authority

Services provided or agreed to be provided by government or local Authority excluding i) Renting of Immovable property and 2) services specified below

i) Services by the Department of Post by way of speed post, express parcel post, Life Insurance, and agency  services provided to a person other than government

ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport

iii) Transport of goods or passengers

Service Provider:  Government or local Authority

Service Receiver: Any Business Entity.

√ General understanding of the above says that In respect of all services provided or agreed to be provided by either Govt. or local Authority there would be reverse charge except if the services are of the nature as provided in exception itself. I.e. renting of immovable property, Department of post services, Airport or port related services and transportation of goods or passengers related services. In respect of these services there would be forward charge and hence paid by Govt. or local authority itself.

√ As it is presumed ( as proposed too) that mostly all exemption for services as contained in existing law will continue in new law too, hence it is quite necessary to have a look on current exemption,

• As per negative list of services, all services provided to business entity, Department of Posts Services by way of speed post, express parcel post, life insurance and agency services etc., Services in relation to transportation of goods or passengers & services in relation to an aircraft or vessel within the Port or airport area would be taxable services. So any services other than these if provided by government or local authority would not be subject to tax.
• So any services to non-business entity by Govt. or local authority except those 03 services would not be levied to tax at all. And as far as business entities are concerned, all services including those 03 services would be subject to Tax. However there are certain more exemption to business entity too by way of notification no 25/2012, so the services mentioned therein would not be levied to tax till the time exemption notification is in currency.
• Notification no 25/2012 exempts following category of services, if provided by Govt. or local Authority;

i) Services for regulation of land use, approval of construction of building, utility services and other services as listed in article 243W of Constitution of India

ii) Services of testing, calibration or safety check or certification required under any law relating to a) protection and safety of workmen b) consumers and c) Public at large

√ So, the services provided by government and local authority are taxable subject to conditions that whether provided to business entity or non-business entity & exemptions as listed in notification no 25/2012. In respect of all services there would be reverse charge except the 04 services (as contained in principal paragraph of Reverse charge schedule) where there is forward charge.

√ Same provision for reverse charge in case of services by Govt. or local Authority exists in current service tax law too at sr. no 06 of notification no 30/2012.

7. Services By a Director to Company or body Corporate

Services provided or agreed to be provided by a director of a company or a body corporate to the Said Company or the body corporate.

Service Provider: Director of a company or body Corporate

Service Receiver: A company or a body Corporate

Reverse Charge: 100%

√ Same provision in existing service tax law too at serial No 05A of Notification No 30/2012.

√ However the concept of Reverse charge comes into picture after the taxability of concerned service is established.

√ Sr. No 01 of Schedule III (which itself specifies the transaction not to be treated as either supply of goods or services) specifies “services by an employee to the employer in the course of or in relation to his employment.

√ So to tax the services provided by a director to his company firstly it is to be established that a director is not an employee of the Company, and lots of Definition and judicial rulings exist in contrary to this

• As per section 2(94) of Companies Act, 2013 a “whole time director includes a director in whole time employment of the company”
• As per rule 2(1)(K) of companies  (Specification of Definitions Details) Rules, 2014 “ Executive Director means a whole time director as defined in Section 2(94) of the 2013 Act.
• If a Managing Director is drawing salary then he has to be covered under EPF provisions as he is an employee {Tin printers Vs RPFC (2000)}
• CIT Vs Gautam Sarabhai (1984), Ram Prasad Vs CIT AIR (1973) SC, Sajid Mowjee V ITO (2005) , in all these cases it was held that A director looking after works of the company and managing the affairs thereon then he is an employee of the company rather than Agent.

√ However my opinion is that if the Director is non-executive then the tax would be levied to various fees paid to him like sitting fees etc. But if the director is executive director then whatever remuneration he is getting would not be levied to tax as received by him in the course of employment, hence not to be treated as supply of service.

8. Insurance Agents Services

Services provided or agreed to be provided by an insurance agent to any person carrying on insurance business.

Service Provide: Insurance Agent

Service Receiver : Person Carrying on Insurance Business

Reverse Charge : 100%

√ Same provision in existing Service tax law too at Sr. No 01 of notification no 30/2012.

√ However In respect of Insurance agent services, His service consideration is included in Insurance premium itself, so the valuation for tax to be levied would be somewhat different.

√ Rule 06 of Draft GST Valuation Rule provides as follows;

“Supply of services in relation to life insurance, the value of supply will be gross premium reduced by investment allocation, in the case of single premium policy will be 10% of premium and in all other cases will be 05% of first year’s premium and 12.5% for other year’s Premium. However this rule shall not apply to premium related to coverage for risk of life.”

√ But in any case the insurance agent services would be under reverse charge mechanism and GST would be paid by Insurance company itself.

9. Recovery Agent Services:

Services provided or agreed to be provided by a recovery agent to banking company or a financial institution or a non-banking financial company.

Service Provider: Recovery Agent

Service Receiver: Banking Company or a Financial Institution or a Non-Banking Financial Company

Reverse Charge: 100%

√ Same provision in existing service tax law too at Sr. No 01A of Notification No 30/2012.

√ Recovery agent is a person who facilitates the recovery of dues outstanding to bank and in respect of those facilitation extended, a lumpsum amount in the form of service fees is paid as % of outstanding debt realised. So as this is supply of service, GST would be levied.

√ But due to reverse charge the GST payable on the fees paid to recovery agent will be paid by Bank or FI or NBFC itself.

10. Transportation of goods (by a Vessel from outside India) services :

Services by way of transportation of goods by a vessel from a place outside India up to the custom station of clearance in India.

Service Provider: A person located in non-taxable territory

Service Receiver: Importer as defined in section 2(26) of Customs Act, 1962

Reverse Charge: 100%

√ No such provision in Existing service tax law in the notification No. 30/2012 regarding Reverse Charge

√ Actually In existing service tax law, negative list of services included this service and hence was not subject to Service tax, However w.e.f. 01st April 2016 such entry was deleted from negative list and hence this service came into ambit of taxation.

√ However no express provision inserted in Notification no 30/2012 consequently, because in either way it’s an importation of service and for that there is already reverse charge prescribed at Sr. no 10 of N.N. 30/2012.

√ Also for importation of services there is a provision of reverse charge at the very beginning of the list proposed under new law too. So, it’s just a repetitive entry.

11. Service in relation to transfer or permitting the use of copyright :

Transfer or permitting the use or enjoyment of a copyright covered under clause a) of subsection (1) of section 13 of the copyright Act, 1957 relating to original, literary, dramatic, musical or artistic works.

Service Provider: Author, music Composer, Photographer, artist etc.

Service Receiver: Publisher, Music Company, Producer etc.

Reverse Charge: 100%

√ In GST regime one thing is very good that the internal conflict of State govt. and Central Govt. will come to an end which often arises due to parallel levy of both taxes on a single transaction.

√ Schedule II of the CGST Bill clearly specifies the transaction which will be treated as supply of goods and which will be as supply of services exclusively. Further as per sub section 03 to Section 07 of The CGST Bill, government have the power to notify that certain transaction is supply of services but not goods and vice versa.

√ Accordingly as per sub clause (c) to clause 05 of Schedule II

“Temporary Transfer or permitting the use or enjoyment of any intellectual property right will be treated as supply of service and GST would be levied on accordingly.”

√ The Intellectual property rights includes Copyright, Patent, Trademarks, Design, and Logo etc. SO if these rights are transferred to someone temporarily or right to use are transferred then it is treated as Supply of services. However if transferred permanently then it would be supply of Goods rather, because goods includes Intangibles also.

√ So instead of transfer the words should be “Temporary Transfer”.

√ Also the Reverse charge is in respect of Copy rights only and in respect of all other IPRs i.e. patent, copyright etc. forward charge would be there.

√ No such provision exists in existing service tax law. New entry in reverse Charge mechanism.

12. Electronic Commerce Operator Services:

Radio Taxi or passenger Transport services provided through electronic commerce Operator.

Service Provider: Taxi Driver or Rent a Cab Operator

Service Receiver: Any Person

Reverse Charge: 100% by Electronic Commerce Operator.

√ Services by way of transportation of passengers is already in negative list in existing service tax laws. However some exclusions/ exceptions are there which means that if the service category falls in that exclusions, tax would be levied. For ex; Transportation of passengers by railway in air conditioned coach, first class etc., public transport predominantly for tourism purposes in a vessel between places located in India, transportation of passengers through radio Taxi( However radio taxi too was included in negative list up to 01-10-2014, but after that it got deleted from there).

√ In GST regime a new terms comes of Electronic Commerce Operator and provision of TCS made applicable to them rate of which cannot exceed 01%.

√ “Electronic Commerce” means the supply of goods or services or both, including digital products over digital or electronic network.” &

“Electronic Commerce operator means any person who owns operates or manages digital or electronic facility or platform for electronic commerce “

√ In present context example of Electronic Commerce could be OLA, UBER etc. providing Passenger transportation system i.e. cab on rent basis over digital platform.

√ However TCS to be collected by Electronic commerce operator is totally distinct from the services provided by particular cab owner to the particular customer. These aggregators just act like a middleman for happening of transaction between those 02.

√ So in actual Electronic Commerce operator has to pay 02 taxes, one TCS collected form consumer and second GST on supply of Transportation service by individual cab owner to individual passenger customer.

√ It’s not a reverse charge actually but a mechanism to collect tax, since entire consideration being collected by Electronic Commerce Operator himself.

√ Same category exists in N.N. 30/2012 in existing service tax law also, but with the name of aggregator services at SR. No 11.

Following Services will not enjoy Reverse Charge Mechanism under New GST law and hence will increase Compliance burden for Person engaged in supply of these services;

1. Service of lottery Selling or Marketing Agent: Currently there exists reverse charge and entire Tax levied to be paid by lottery distributor or selling agent

2. Renting or Hiring of Motor Vehicle designed to carry Passengers to any person who is not in the same line of business: again there is reverse charge now and the person taking motor vehicle on hire is supposed to pay tax levied.

3. Supply of Man power for any purpose or security services: 100% reverse charge on the service recipient in existing service tax law. But after enactment of GST law, there would be forward charge and service provider have to himself pay the taxes.

4. Work Contract Services: Currently partial reverse charge is here. Also if the service provider is either individual, HUF, Partnership firm or AOP etc. and service receiver is body corporate then only reverse charge is applicable and tax to be paid in 1:1 ratio i.e. 50% by either one. But in GST regime there would not be reverse charge at all and every person engaged in supply of manpower services have to pay taxes on forward charge basis.

Invoice Format Under GST